Pension Funds Lead in Corporate Cases, Enhancing Big Fee Demands

A lone investor with just nine shares in Tesla Inc. led the fight over Elon Musk’s $56 billion pay package, but high-stakes cases at the Delaware Chancery Court are far more likely to be brought by those with much larger investments: pension funds.

Labor union and state or municipal pension funds are common plaintiffs in shareholder disputes with big name companies, including Tesla and Dell, because they hold large tranches of stock and are savvy enough to take on complex litigation.

“Pension funds are more likely to be clients because they are easily identifiable, sophisticated investors that the plaintiff’s bar can quickly contact and explain the theory of the case,” said Paul Weitzel, a University of Nebraska law professor.

The phenomenon dates to the mid-1990s, with the passage of federal legislation intended to limit frivolous securities lawsuits, said Charles Elson, a retired University of Delaware professor and founder of the school’s Weinberg Center for Corporate Governance.

That pushed larger institutional investors to take on lawsuits that previously had been brought by individual investors who hadn’t lost much, Elson said.

Institutional investors as plaintiffs “suggested that the cases were driven, rather than by plaintiffs’ lawyers seeking a fee, instead by institutions who were large shareholders and who were seriously, monetarily harmed by the corporate misconduct.”

Legal Fees

The financial stakes for pension funds can bring larger paydays—and prestige—for law firms.

Last year, the attorneys who negotiated a steamfitters’ pension fund’s $1 billion settlement with Dell Technologies Inc. over a 2018 stock conversion were awarded a $266.7 million fee.

The court’s chief judge, Kathaleen St. Jude McCormick, currently is considering whether the lawyers representing the pension fund that pushed Tesla to agree to a $919 million settlement over board compensation deserve a $230 million fee award.

Tesla argues $63.5 million in legal fees would suffice. McCormick has said her decision whether to approve the settlement and attorneys’ fees will depend on how she decides what fees are reasonable for the lawyers in the other case where they successfully challenged Musk’s executive compensation. Those attorneys asked to be paid with over 29 million Tesla shares worth about $6 billion.

Both fee award requests are likely to raise similar legal arguments, McCormick said in a Jan. 31 letter to the parties in the board pay case.

The lawyers who take on these kinds of lawsuits—seeking to hold directors accountable for fiduciary duties—accept a high level of risk, said Paul Regan, a professor at the Widener University Delaware Law School.

Many such lawsuits get dismissed, or the court may only award modest fees. Working with pension funds enhances a law firm’s credibility, he said.

“A client with a stake that’s big enough to say to the court, ‘Look, I’m here for the long haul, I’m highly invested in how this goes, and I have the resources to monitor it as the lead plaintiff,’ probably makes an impact,” Regan said.

Public or Private?

Pension funds also are leading litigation against Fox News directors for decisions that ultimately led to a $787.5 million defamation settlement with Dominion Voting Systems Inc.

Vice Chancellor J. Travis Laster selected entities representing public employees’ retirement funds in Oregon and New York City as lead plaintiffs over two other investment funds based in Sweden and the Cayman Islands.

Public funds may hold certain advantages over private ones. In his opinion, Laster cited access to internal expertise and legal resources offered by the New York City Comptroller, the Oregon State Treasurer, and the Oregon Department of Justice as reasons for selecting them as lead plaintiffs.

“They are not so-called ‘private attorneys general’ who have voluntarily taken up the litigation cudgel on behalf of stockholders or a corporation in pursuit of profit,” Laster said.

As agents of the state, “They carry more weight,” Elson said.

When the dust settles on those multi-million-dollar settlements or judgments to benefit all shareholders of a company, a pension fund might only take home a plaintiffs’ award of a few thousand dollars for itself, Regan said.

The funds primarily get involved to show “all these hardworking people who are trying to plan a retirement” that the people responsible for those pensions are are going to hold directors accountable, he said.